124 T.C. No. 9
UNITED STATES TAX COURT
RONALD J. AND JUNE M. SPELTZ, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 15382-03L. Filed March 23, 2005.
Ps incurred AMT liability as a result of their exercise of incentive stock options in 2000. The stock declined precipitously in value after the date of exercise. Ps partially paid the tax liability and submitted an offer in compromise with respect to the unpaid balance. The IRS rejected the offer in compromise and filed a lien on Ps’ property. Held: It was not an abuse of discretion to reject Ps’ offer in compromise and to continue the lien.
Timothy J. Carlson, for petitioners.
Albert B. Kerkhove and Stuart D. Murray, for respondent. - 2 -
OPINION
COHEN, Judge: This case is before the Court on respondent’s
motion for summary judgment, seeking a determination sustaining
an Appeals officer’s rejection of petitioners’ offer in
compromise. Petitioners seek a summary determination that it was
an abuse of discretion to refuse their offer in compromise
because of the unfair application of the alternative minimum tax
(AMT) based on their exercise of incentive stock options (ISOs)
where the stock acquired by exercise of the ISOs has lost
substantially all of its value subsequent to the acquisition of
the stock. Unless otherwise indicated, all section references
are to the Internal Revenue Code as amended, and all Rule
references are to the Tax Court Rules of Practice and Procedure.
Background
In ruling on respondent’s motion for summary judgment,
factual inferences are viewed in the light most favorable to
petitioners. Preece v. Commissioner, 95 T.C. 594, 597 (1990).
Thus, the background facts set forth herein are based primarily
on petitioners’ declaration in opposition to the motion for
summary judgment and on other materials submitted by petitioners.
Petitioners resided in Ely, Iowa, at the time that they
filed their petition. For some years prior to 2000, petitioner
Ronald J. Speltz (petitioner) was employed by McLeodUSA (McLeod).
By 2000, petitioner was a senior manager at McLeod earning wages - 3 -
in excess of $75,000. By 2004, petitioner’s wages were
approximately $90,000 per year. As part of his compensation at
McLeod, petitioner received ISOs for acquisition of McLeod stock.
During the year 2000, petitioner exercised certain of the
ISOs that he previously had received. On petitioners’ Form 1040,
U.S. Individual Income Tax Return, for 2000, petitioners
reported, for purposes of the AMT, those ISOs as resulting in
“excess of AMT income over regular tax income” of $711,118. On
their Form 1040, petitioners reported that their “regular”
adjusted gross income was $142,070. Their taxable income was
$105,461, and their “regular” tax was $18,678. Petitioners
reported AMT of $206,191 for a total tax liability of $224,869.
After application of Federal income tax withheld, the balance
owed on petitioners’ tax liability for 2000 was $210,065.
Petitioners also filed a 2000 Iowa Individual Income Tax Long
Form, IA 1040, on which they reported Iowa minimum tax of $46,792
and a total tax liability of $56,769.
The value of petitioners’ McLeod stock dropped
precipitously. On their tax return for 2000, petitioners
reported that they sold 200 shares of McLeod stock on January 14
for a total of $14,011 and 500 shares of McLeod stock on March 10
for a total of $52,282. On their tax return for 2002,
petitioners reported that they sold 2,070 shares of McLeod stock
on December 30 for a total of $1,647. - 4 -
Petitioners partially paid the liability reported on their
2000 Form 1040 at the time that it was filed and paid an
additional $75,000 in installments prior to November 2, 2001.
Petitioners borrowed $134,000 from a bank to pay State and
Federal taxes reported on their 2000 returns.
On or about November 2, 2001, petitioners submitted to the
Internal Revenue Service (IRS) a Form 656, Offer in Compromise.
Petitioners offered a cash payment of $4,457, the cash value of
petitioner’s life insurance policy, against the liability that
then exceeded $125,000. On the Form 656, petitioners checked the
box for “Doubt as to Collectibility--‘I have insufficient assets
and income to pay the full amount.’” Petitioners also attached
to Form 656 a statement in which they explained that an offer in
compromise was necessary because of the impact the AMT in 2000
had on their finances and their lifestyle. Specifically,
petitioner’s income in 2000 was at a comfortable level for a
family of five including three young daughters; the McLeod stock
they held was nearly worthless and declining and had been used to
secure a $134,000 loan with a bank to pay part of the 2000
Federal and State taxes; and, in the event of a sale of the stock
(forced or otherwise), petitioners would be unable to carry back
the capital loss to offset their 2000 gain. They began building
a new home in 2000 and sold their prior home in 2001, using the
proceeds of sale to repay the bank. Lifestyle changes were - 5 -
necessary, including: Petitioner June M. Speltz had to get a job
instead of staying home with the children; the oldest daughter
had to switch schools; petitioners were unable to contribute to
their retirement and to their children’s education fund; and they
had to reduce their charitable donations. Finally, they could
not afford to have a fourth child, which they had wanted.
Petitioners offered in compromise $4,457, the cash surrender
value on petitioner’s life insurance. In the statement,
petitioners expressed their mental anguish and frustration with
the unfairness of their situation.
Petitioners’ offer in compromise was reviewed by Revenue
Officer Robert G. Dallas (Dallas), an offer in compromise
specialist. Dallas indicated to petitioners that he was
rejecting the offer in compromise because petitioners had the
ability to pay the outstanding tax liability in full. On
October 6, 2002, petitioners wrote to Dallas disputing amounts
that Dallas had used in his calculation. On October 9, 2002,
Dallas indicated that certain adjustments that were requested by
petitioners had been made. He wrote, however:
The adjustments to the Income/Expense table you requested have not been granted because the allowed amount * * * is the allowable housing and utility standard for families of your number in Linn County, Iowa. The excess expenses you have claimed * * * cannot be moved * * * solely to circumvent the allowable standard amount.
Based upon your current financial condition, we have determined that you have the ability to pay your - 6 -
liability in full within the time provided by law. We have made this determination based on the following computations:
Total net equity in assets: $77,948.00 Total future ability to pay and retire debt: $113,568.00 Total ability to pay: $191,516.00 Total balance due: $148,744.64 Amount you offered: $4,457.00
Copies of our worksheets are enclosed for your review.
Your options at this time are to pay your liability in full, enter into an installment agreement, withdraw your offer using the withdrawal letter previously provided or withhold your response and appeal your offer’s failure to gain acceptance through the appeal procedure that you will be offered. Please advise of your preferred course of action.
Please respond within 14 days of the date of this letter. If you fail to respond or if your response is egregiously inadequate, a Federal Tax Lien will be filed if one is not already a matter of record and the case will be forwarded to an independent reviewer without a recommendation for approval. If the reviewer concurs with the conclusion of my investigation, you will be notified by mail and advised of your appeal rights. If there is a need for additional information you will be notified.
On December 17, 2002, respondent sent to petitioners a
Letter 3172, Notice of Federal Tax Lien Filing and Your Right to
a Hearing Under IRC 6320, with respect to their unpaid income tax
liability for 2000, advising that petitioners could request a
hearing with respondent’s Office of Appeals. On January 13,
2003, petitioners submitted a Form 12153, Request for a
Collection Due Process Hearing. Petitioners stated that they
were disagreeing with the Notice of Federal Tax Lien because: - 7 -
Forms 433-A and 656 have been prepared and filed with the IRS as an Offer in Compromise. The only real estate owned by the taxpayers is their personal residence * * *. Such residence constitutes exempt property, and therefore, the IRS’ attempted lien is unenforceable.
Petitioners’ Request for a Collection Due Process Hearing was
signed by their then attorney.
On February 12, 2003, a telephone conference was held
between respondent’s Appeals Officer Eugene H. DeBoer (DeBoer)
and petitioners’ attorney. On February 13, 2003, DeBoer wrote to
petitioners’ attorney a letter summarizing their discussion and
stating the following:
In regards to your question about changes to the alternative minimum tax laws. At this time there is no pending legislation that would retroactively change how the AMT was computed for 2000. Accordingly, the tax as reported appears to be correct.
Neither petitioners nor their attorney responded to the
February 13, 2003, letter from DeBoer. Instead, petitioners’
attorney contacted their Senator and the Taxpayer Advocate
Service.
On August 12, 2003, a Notice of Determination Concerning
Collection Action(s) Under Section 6320 and/or 6330 was sent to
petitioners. The attachment to the notice explained the
determination as follows: - 8 -
SUMMARY AND RECOMMENDATION
Should the lien be released or withdrawn?
No, the tax as assessed is deemed correct and the offer in compromise proposed by the taxpayers has been rejected.
BRIEF BACKGROUND
Mr. and Mrs. Speltz filed their 2000 return showing a liability of $209,749.77. They made a payment with the return of $17,565. Payments of $70,000 were made prior to an installment agreement which was entered into for $2,500. Two payments of $2,500 made prior to the filing of an offer in compromise of $4,457 on 11/2/2001. The offer was rejected due to the taxpayers having assets and the ability to full pay the liability. A lien was then filed. The taxpayers’ representative states on the request for a collection due process hearing that the personal residence constitutes exempt property and therefore the IRS’ attempted lien is unenforceable. A phone conference was held with the representative, * * * who questioned whether there was any pending legislation aimed at changing how the alternative minimum tax is computed. A check with the national office shows that there is no pending legislation to retroactively adjust how the alternative minimum tax is computed.
DISCUSSION AND ANALYSIS
1. Verification of legal and procedural requirements; Yes
2. Issues raised by the taxpayer; The offer in compromise was rejected.
3. Balancing of need for efficient collection with taxpayer concern that the collection action be no more intrusive than necessary. The collection action balances the need for the efficient collection of taxes with the Speltz’s legitimate concern that the collection action be no more intrusive than necessary.
The petition in this case was filed by petitioners pro se;
counsel entered his appearance after respondent filed a motion - 9 -
for summary judgment. In their petition, petitioners do not
allege any specific abuse of discretion with respect to the
notice of determination. Instead, they refer to their
communications with the Taxpayer Advocate’s Office and to the
office of their Senator.
Discussion
Section 6321 imposes a lien in favor of the United States on
all property and rights to property of a person when a demand for
the payment of the person’s taxes has been made and the person
fails to pay those taxes. Section 6322 provides that such a lien
arises when an assessment is made. To protect the Government’s
rights to recover its unpaid taxes, section 6323(a) provides that
the IRS may file a notice of Federal tax lien in order to
establish the priority of its claims against the taxpayer’s other
creditors.
In the Internal Revenue Service Restructuring and Reform Act
of 1998 (RRA 1998), Pub. L. 105-206, sec. 3401, 112 Stat. 746,
Congress enacted sections 6320 (pertaining to liens) and 6330
(pertaining to levies) to provide protections for taxpayers in
tax collection matters. Section 6320 requires that the Secretary
notify a person who has failed to pay a tax liability of the
filing of a notice of lien under section 6323. The notice
required by section 6320 must be provided not more than 5
business days after the day of the filing of the notice of lien, - 10 -
pursuant to section 6320(a)(2). Section 6320 further provides
that the person so notified may request administrative review of
the matter (in the form of a hearing) within 30 days beginning on
the day after the 5-day period. Under section 6320(c), the
hearing generally is to be conducted consistent with the
procedures set forth in section 6330(c), (d), and (e). Section
6330(c) permits the person notified to raise collection issues
such as spousal defenses, the appropriateness of the
Commissioner’s intended collection action, and possible
alternative means of collection.
Section 6330(d) provides for judicial review of the
administrative determination. Where the validity of the
underlying tax liability is not properly at issue, the Court will
review the Commissioner’s administrative determination for abuse
of discretion. See Sego v. Commissioner, 114 T.C. 604, 609
(2000); Goza v. Commissioner, 114 T.C. 176, 179 (2000); see also
H. Conf. Rept. 105-599, at 266 (1998), 1998-3 C.B. 747, 1020.
Also in 1998, Congress amended section 7122, which
authorizes compromise of any civil case arising under the
internal revenue laws. RRA 1998, sec. 3462, 112 Stat. 764.
Subsections (c) and (d) of section 7122 were amended for proposed
offers in compromise and installment agreements submitted after
July 22, 1998, and provide as follows: - 11 -
SEC. 7122(c). Standards for Evaluation of Offers.--
(1) In general.–-The Secretary shall prescribe guidelines for officers and employees of the Internal Revenue Service to determine whether an offer-in-compromise is adequate and should be accepted to resolve a dispute.
(2) Allowances for basic living expenses.--
(A) In general.–-In prescribing guidelines under paragraph (1), the Secretary shall develop and publish schedules of national and local allowances designed to provide that taxpayers entering into a compromise have an adequate means to provide for basic living expenses.
(B) Use of schedules.–-The guidelines shall provide that officers and employees of the Internal Revenue Service shall determine, on the basis of the facts and circumstances of each taxpayer, whether the use of the schedules published under subparagraph (A) is appropriate and shall not use the schedules to the extent such use would result in the taxpayer not having adequate means to provide for basic living expenses.
(3) Special rules relating to treatment of offers.–-The guidelines under paragraph (1) shall provide that--
(A) an officer or employee of the Internal Revenue Service shall not reject an offer-in-compromise from a low-income taxpayer solely on the basis of the amount of the offer; and
(B) in the case of an offer-in- compromise which relates only to issues of liability of the taxpayer--
(i) such offer shall not be rejected solely because the Secretary is unable to locate the taxpayer’s return - 12 -
or return information for verification of such liability; and
(ii) the taxpayer shall not be required to provide a financial statement.
(d) Administrative Review.–-The Secretary shall establish procedures--
(1) for an independent administrative review of any rejection of a proposed offer-in-compromise or installment agreement made by a taxpayer under this section or section 6159 before such rejection is communicated to the taxpayer; and
(2) which allow a taxpayer to appeal any rejection of such offer or agreement to the Internal Revenue Service Office of Appeals.
Regulations adopted pursuant to section 7122 set forth three
grounds for the compromise of a liability: (1) Doubt as to
liability; (2) doubt as to collectibility; or (3) promotion of
effective tax administration. Sec. 301.7122-1, Proced. & Admin.
Regs. With respect to the third ground, paragraph (b)(3)(i) of
the regulation allows for a compromise to be entered into to
promote effective tax administration where collection in full
could be achieved but would cause economic hardship. Paragraph
(c)(3)(i) sets forth factors that would support (but are not
conclusive of) a finding of economic hardship. With respect to
the third ground, those regulations state:
(3) Compromises to promote effective tax administration.–-(i) Factors supporting (but not conclusive of) a determination that collection would cause economic hardship within the meaning of paragraph (b)(3)(i) of this section include, but are not limited to-- - 13 -
(A) Taxpayer is incapable of earning a living because of a long term illness, medical condition, or disability, and it is reasonably foreseeable that taxpayer’s financial resources will be exhausted providing for care and support during the course of the condition;
(B) Although taxpayer has certain monthly income, that income is exhausted each month in providing for the care of dependents with no other means of support; and
(C) Although taxpayer has certain assets, the taxpayer is unable to borrow against the equity in those assets and liquidation of those assets to pay outstanding tax liabilities would render the taxpayer unable to meet basic living expenses.
The regulation states that no compromise may be entered into if
such compromise of liability would undermine compliance by the
taxpayer with the tax laws. Sec. 301.7122-1(b)(3)(iii), Proced.
& Admin. Regs. Paragraph (c)(3)(ii) then sets forth factors that
support (but are not conclusive of) a determination that a
compromise would undermine compliance with the tax laws. These
factors include: (A) A taxpayer who has a history of
noncompliance with the filing and payment requirements of the
Internal Revenue Code; (B) a taxpayer who has taken deliberate
action to avoid the payment of taxes; and (C) a taxpayer who has
encouraged others to refuse to comply with the tax laws. Sec.
301.7122-1(c)(3)(ii), Proced. & Admin. Regs. The regulation
continues:
(iii) The following examples illustrate the types of cases that may be compromised by the Secretary, at the Secretary’s discretion, under the economic hardship provisions of paragraph (b)(3)(i) of this section: - 14 -
Example 1. The taxpayer has assets sufficient to satisfy the tax liability. The taxpayer provides full time care and assistance to her dependent child, who has a serious long-term illness. It is expected that the taxpayer will need to use the equity in his assets to provide for adequate basic living expenses and medical care for his child. The taxpayer’s overall compliance history does not weigh against compromise.
Example 2. The taxpayer is retired and his only income is from a pension. The taxpayer’s only asset is a retirement account, and the funds in the account are sufficient to satisfy the liability. Liquidation of the retirement account would leave the taxpayer without an adequate means to provide for basic living expenses. The taxpayer’s overall compliance history does not weigh against compromise.
Example 3. The taxpayer is disabled and lives on a fixed income that will not, after allowance of basic living expenses, permit full payment of his liability under an installment agreement. The taxpayer also owns a modest house that has been specially equipped to accommodate his disability. The taxpayer’s equity in the house is sufficient to permit payment of the liability he owes. However, because of his disability and limited earning potential, the taxpayer is unable to obtain a mortgage or otherwise borrow against this equity. In addition, because the taxpayer’s home has been specially equipped to accommodate his disability, forced sale of the taxpayer’s residence would create severe adverse consequences for the taxpayer. The taxpayer’s overall compliance history does not weigh against compromise.
Under the regulations, a compromise may also be entered into to
promote efficient tax administration if there are compelling
public policy or equity considerations identified by the
taxpayer. Compromise is justified where, due to exceptional
circumstances, collection would undermine public confidence that
tax laws are being administered fairly. Sec. - 15 -
301.7122-1(b)(3)(ii), Proced. & Admin. Regs. Some examples where
a compromise is allowed for purposes of public policy and equity
are: (1) A taxpayer who was hospitalized regularly for a number
of years and was unable, at that time, to manage his financial
affairs and (2) a taxpayer learns at audit that he was given
erroneous advice and is facing additional taxes, penalties, and
additions to tax. Sec. 301.7122-1(c)(3)(iv), Proced. & Admin.
Regs. In addition to the regulations, detailed instructions
concerning offers in compromise are contained in the Internal
Revenue Manual, sections 5.8. Relevant portions are as follows:
Sec. 5.8.11.2.2 (05-15-2004) Public Policy or Equity Grounds
1. Where there is no Doubt as to Liability (DATL), no Doubt as to Collectibility (DATC), and the liability could be collected in full without causing economic hardship, the Service may compromise to promote Effective Tax Administration (ETA) where compelling public policy or equity considerations identified by the taxpayer provide a sufficient basis for accepting less than full payment. Compromise is authorized on this basis only where, due to exceptional circumstances, collection in full would undermine public confidence that the tax laws are being administered in a fair and equitable manner. Because the Service assumes that Congress imposes tax liabilities only where it determines it is fair to do so, compromise on these grounds will be rare.
2. The Service recognizes that compromise on these grounds will often raise the issue of disparate treatment of taxpayers who can pay in full and whose liabilities arose under substantially similar circumstances. Taxpayers seeking compromise on this basis - 16 -
bear the burden of demonstrating circumstances that are compelling enough to justify compromise notwithstanding this inherent inequity.
3. Compromise on public policy or equity grounds is not authorized based solely on a taxpayer’s belief that a provision of the tax law is itself unfair. Where a taxpayer is clearly liable for taxes, penalties, or interest due to operation of law, a finding that the law is unfair would undermine the will of Congress in imposing liability under those circumstances.
Example:
The taxpayer argues that collection would be inequitable because the liability resulted from a discharge of indebtedness rather than from wages. Because Congress has clearly stated that a discharge of indebtedness results in taxable income to the taxpayer it would not promote Effective Tax Administration (ETA) to compromise on these grounds. See Internal Revenue Code (IRC) 61(a)(12).
In 1983, the taxpayer invested in a nationally marketed partnership which promised the taxpayer tax benefits far exceeding the amount of the investment. * * * [T]he IRS made a global settlement offer in which it offered to concede a substantial portion of the interest and penalties that could be expected to be assessed if the IRS’s determinations were upheld by the court. The taxpayer rejected the settlement offer. After several years of litigation, the partnership level proceeding eventually ended in Tax Court decisions upholding the vast majority of the deficiencies asserted in the FPAA on the grounds that the partnership’s activities lacked economic substance. The taxpayer has - 17 -
now offered to compromise all the penalties and interest on terms more favorable than those contained in the prior settlement offer, arguing that TEFRA [Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. 97-248, 96 Stat. 324] is unfair and that the liabilities accrued in large part due to the actions of the Tax Matters Partner (TMP) during the audit and litigation. * * *
Note:
In both of these examples, the taxpayers are essentially claiming that Congress enacted unfair statutes and are arguing that the Service should use its compromise authority to rewrite those statutes based on a perception of unfairness. Compromise for that reason would not promote effective tax administration. The compromise authority under Section 7122 is not so broad as to allow the Service to disregard or override the judgments of Congress. [1 Administration, Internal Revenue Manual (CCH), sec. 5.8.11.2.2, at 16,385-7 to 16,385-8.]
We need not detail in this opinion the complexities of the
AMT imposed by sections 55 and 56 or the taxation of ISOs under
sections 421 and 422. Petitioners do not dispute the
applicability of those sections or the computations under them.
The tax liability in this case was based on petitioners’
reporting on their Form 1040 for 2000. Nonetheless, petitioners
devote a substantial portion of their posthearing memorandum to
arguing that:
The Speltzes request for relief under the OIC Statute, from the unintended harm being caused them by the rote application of the AMT ISO Statute, does not put the IRS or this Court in a position where Section 7122 is undermining Congressional intent with respect to any other statute–-including the AMT ISO Statute. Rather, based on their special circumstances in their particular situation, the rote and literal application of the internal revenue laws is imposing an impossible- - 18 -
to-pay 220% tax rate or 11x the tax required of a similarly situated taxpayer–-an unintended result not consistent with the legislative purpose of Congress for any internal revenue law. In such a special case, Congress intended that the OIC Statute would operate to step in and provide relief from this unintended and unfair tax liability arising from unintended results arising from the literal application of the internal revenue laws (in this case, the AMT ISO Statute).
Petitioners contend that there was an abuse of discretion
because:
The IRS failed to consider (or if it did consider it failed to properly consider), under the principles and processes laid out in Section 7122, corresponding regulations 26 CFR 301.7122, and the corresponding IRM provisions, the special circumstances raised by the Speltzes in their offer in compromise.
Petitioners argue that “under their special circumstances
the tax liability being imposed on them is unfair and
inequitable, a situation for which Congress has fashioned a
remedy in the law--Section 7122.” The crux of petitioners’
position is that section 7122 “trumps” the literal application of
statutes imposing a tax in their situation and that, therefore,
it was an abuse of discretion by the Appeals Office not to accept
their offer in compromise.
Respondent, on the other hand, contends that the Appeals
officer correctly applied the statute, the regulations, and the
Internal Revenue Manual provisions. For the reasons explained
below, we agree with respondent.
The unfortunate consequences of the AMT in various
circumstances have been litigated since shortly after the - 19 -
adoption of the AMT. In many different contexts, literal
application of the AMT has led to a perceived hardship, but
challenges based on equity have been uniformly rejected. See,
e.g., Alexander v. Commissioner, 72 F.3d 938 (1st Cir. 1995),
affg. T.C. Memo. 1995-51; Okin v. Commissioner, 808 F.2d 1338
(9th Cir. 1987), affg. T.C. Memo. 1985-199; Warfield v.
Commissioner, 84 T.C. 179 (1985); Huntsberry v. Commissioner, 83
T.C. 742, 747-753 (1984); Prosman v. Commissioner, T.C. Memo.
1999-87; Klaassen v. Commissioner, T.C. Memo. 1998-241, affd.
without published opinion 182 F.3d 932 (10th Cir. 1999).
In Kenseth v. Commissioner, 259 F.3d 881, 885 (7th Cir.
2001), affg. 114 T.C. 399 (2000), the Court of Appeals for the
Seventh Circuit commented:
it is not a feasible judicial undertaking to achieve global equity in taxation * * * especially when the means suggested for eliminating one inequity (that which Kenseth argues is created by the alternative minimum income tax) consists of creating another inequity (differential treatment for purposes of that tax of fixed and contingent legal fees). And if it were a feasible judicial undertaking, it still would not be a proper one, equity in taxation being a political rather than a jural concept. * * *
Most recently, in Commissioner v. Banks, 543 U.S. ___, 125 S.Ct.
826 (2005), the U.S. Supreme Court emphasized that the issue of
the effect of the AMT on cases such as Kenseth v. Commissioner,
supra, involving the deductibility of attorney’s fees, has
partially been addressed by Congress. We believe that here, too,
the solution must be with Congress. - 20 -
Petitioners have submitted materials from congressional,
Taxpayer Advocate, and bar association sources, dealing with a
widespread perception that application of the AMT to ISOs is
unfair and should be the subject of redress. Respondent argues
that petitioners did not raise efficient tax administration as a
ground in their original offer in compromise and that we should
not consider materials beyond the administrative record. The
Court has indicated that we are not confined to the
administrative record. Robinette v. Commissioner, 123 T.C. 85,
94-104 (2004). However, most of the material that petitioners
attached to their filings is not part of the administrative
record, is not admissible evidence, and was in large part
generated subsequent to the notice of determination that is the
basis of this case. Such material does not show that there was
an abuse of discretion by the Appeals officer when the notice of
determination was sent on August 12, 2003. See Sego v.
Commissioner, 114 T.C. 604, 612 (2000).
Petitioners’ materials, in any event, could support
arguments both for and against petitioners’ position.
Petitioners assert that those materials show “public policy”. In
our view, however, those materials show that Congress is well
aware of the claimed inequities resulting from the application of
the AMT and has, so far, declined to act. In the absence of
congressional action, we cannot discern public policy from the - 21 -
materials tendered by petitioners. Moreover, the materials
submitted by petitioners show that their situation is,
unfortunately, not unique.
We do not discern in section 7122 an intent of Congress to
override application of specific provisions of the tax laws in
every instance in which the liability is perceived to be unfair
or inequitable. As the Court of Appeals for the Seventh Circuit
observed in Kenseth v. Commissioner, supra, this is not a
feasible judicial function. A fortiori, individual revenue
officers and Appeals officers, carrying out their respective
functions in the IRS collection process, cannot be expected to
engage in the type of statutory interpretation urged on us by
petitioners or to nullify unfortunate consequences of the tax
laws on a case-by-case basis. The terms of section 7122, the
regulations adopted under it, and the Internal Revenue Manual are
consistent with the experience and expertise of IRS personnel in
evaluating financial circumstances. Petitioners do not argue
that the regulations or the Internal Revenue Manual provisions
are invalid. They claim that they were not followed. But terms
such as “promotion of effective tax administration”, “special
circumstances”, and “compelling public policy or equity
considerations” have a narrower meaning than that urged by
petitioners, and the explanations of those terms in the - 22 -
regulations and in the Internal Revenue Manual are not
unreasonable.
Unlike the examples set forth under section 301.7122-1(c),
Proced. & Admin. Regs., petitioners do not claim illness or a
medical condition or disability; they do not have income that is
exhausted providing for the care of dependents; and they have
sufficient income to meet “basic living expenses”. Petitioners’
hardship argument is essentially that the tax liability is
disproportionate to the value that they received from the ISOs
and that they have already been forced to change their lifestyle
unreasonably. Although we sympathize with their situation, this
type of hardship is not unique.
Petitioners argue that the AMT imposed on their exercise of
ISOs is a “prepayment” of tax on value that they never received.
Under the statutory scheme, however, the tax imposed at the time
of exercise of ISOs is a deferred tax on a form of compensation
that petitioners received at an earlier time. See Commissioner
v. LoBue, 351 U.S. 243 (1956). As explained in Luckman v.
Commissioner, 418 F.2d 381, 384 (7th Cir. 1969), revg. and
remanding on other grounds 50 T.C. 619 (1968), stock options
“represent a form of compensation paid to employees in connection
with successful present and future business performance. They
constitute a particularly rewarding form of bonus.” See
generally 1 Mertens, Law of Federal Income Taxation, sec. 601 - 23 -
(2005 rev.). Because of sections 421(a) and 422, regular tax at
ordinary rates that would normally be imposed on compensation is
not imposed on the receipt or exercise of ISOs. See sec. 83(a),
(e)(1). The offset, however, is that ISOs are treated as “tax
preference items” for AMT purposes in section 56(b)(3).
In addition to affecting the time of taxation, the
complexity of statutes applicable to stock options involves
differences between taxation at ordinary income rates and capital
gains rates. See generally Luckman v. Commissioner, supra at
386-387. Accepting petitioners’ position would result in
nullification of a portion of the statutory scheme by
administrative or judicial action. We cannot conclude that
section 7122 gives the Court a license to make adjustments to
complex tax laws on a case-by-case basis. Cf. Rank v. United
States, 345 F.2d 337, 344-345 (5th Cir. 1965) (describing other
circumstances in which “the attention of Congress was once again
focused on this highly complex, if not controversial, question of
employee stock options”). Moreover, we cannot conclude that it
is an abuse of discretion for the Appeals officer to decline to
do so. In this case, we conclude that the Appeals officer
correctly applied the provisions of the regulations and of the
Internal Revenue Manual, specifically those portions cautioning
against granting relief based on inequity where to do so would
undermine congressional intent. - 24 -
The Appeals officer considered and adjusted the financial
information submitted by petitioners and concluded that
petitioners could pay the balance of their tax liability by use
of an installment agreement. See generally Orum v. Commissioner,
123 T.C. 1, 13-14 (2004). Neither the information provided to
the Appeals officer nor that provided to the Court in this case
shows that it was not reasonable for the Appeals officer to
conclude that petitioners have the ability to pay over time the
balance of the tax liability. Petitioners contend that they
should not be required to pay the full amount. We are not
unsympathetic to the burdens and lifestyle changes that
petitioners have and may suffer as a result of their tax
liability. Petitioners have not contended or shown, however, any
invalidity in the Appeals officer’s determination of their basic
living expenses as that term is used in section 7122.
Petitioners seek to have the Court redefine “hardship”, “special
circumstances”, and “efficient tax administration” in a manner
different from that set forth in the regulations and in the
Internal Revenue Manual.
There is a dispute between the parties with respect to the
individual adjustments used by the Appeals officer in determining
that petitioners could pay the remaining tax liability under an
installment plan. Respondent has suggested some revised
computations and a remand for further consideration of - 25 -
petitioners’ offer in compromise if the motion for summary
judgment is denied. Petitioners have repudiated this suggestion
and asked us to decide this case on the arguments presented. In
view of petitioners’ position, for purposes of this case, that
they should not be required to pay any more than the amount that
they offered, differences as to the calculation of their ability
to pay installments are not material and do not preclude
resolution of this case on summary judgment. See Rule 121(b).
We are not in a position to determine the amount or duration of
any installments that petitioners could or should be required to
pay. The only issue before us is whether there was an abuse of
discretion in refusing the offer in compromise in the amount of
$4,457 and concluding that the lien filed by the IRS should
remain in place. As respondent points out, any levy on
particular assets of petitioners that the IRS proposes to pursue
in the future will also require notice and an opportunity to be
heard under section 6320 or 6330. Petitioners may submit another
offer in compromise. Petitioners’ income and expenses may
change. We conclude, however, that there was no abuse of
discretion in declining to accept petitioners’ offer dated
November 2, 2001, and continuing the lien in effect.
Order and Decision will
be entered for respondent.